REDEFINING PRICING IN WESTERN NATURAL GAS MARKETS

Last year's expansion of Kern River pipeline has fundamentally altered the western gas market. This structural change has contributed to a new pricing dynamic-the "Continental Divide." Continental Divide pricing-the widening basis between the East and the West-occurs when western supplies compete in periods of low western US gas demand. Gas-on-gas competition among supply basins drives down prices and pushes out the marginal gas flows from the swing basins. The dynamic reverses when spiking western gas demand pulls Permian and western Canadian supplies into the market. The result is a rapid reconnection with eastern markets prices and tightening basis. The new western gas market dynamic is characterized by

- increased basis volatility as swing suppliers shift with changes in gas demand
- displacement of lower-efficiency generation in the Los Angeles Basin as access to lower cost Rockies supply has increased for Kern-connected generators
- displacement of western Canadian and Permian supplies out of the West

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